Traditionally an investor invests in stocks that are about to appreciate in the market. They make their profit by buying the stocks at lower price and selling them at a higher price when the stocks are appreciated. But in short selling the process is just the opposite. In short selling investors choose the stocks that they are sure will fall in the market. They first sell the stock at a higher price and then buy them back at lower price and make their profit in the process. Before we tell you how to make profit by short selling the stocks let us first explain how exactly the process of short selling works.

For trading in stocks you have to buy and sell stocks through the broker. You can trade in the stocks in primarily two ways – long and short. When you are going long in an investment you are actually buying the stocks believing that the price of the stock will increase. On the other hand when you are short selling you are actually selling the stocks in anticipation that the price will go down. Stocks can be traded either in cash segment or in the margin. In cash segment you are paying the full amount of the price of the stock and in the margin trading the broker is paying for the part of the price and the stocks act as the collateral in this case. Short selling can be done only through the margin trading. When you are short selling a stock you are actually selling a stock that you do not have. These stocks are lent by your broker either from his account or from some buyers account or may be from some other brokers account. Once the stocks are sold by you the proceeds are transferred to your account but you have to close that deal by buying back the same number of stocks that you have sold within a specific time, generally within the trading hours of that day. If the stock prices fall then you will get the profit after you have bought the stocks at lower price, if the price goes up you have to pay for the loss as you will be buying the stocks at a higher price.

Though in most cases you have to close the deal of short selling by buying the stocks within the same day, you can also hold the short for as many days as you want. But for that you have to pay for the interest. But this is possible only if the owner of the stock permits that you hold the short and stocks are available so that you can hold the short. Though it is a rare possibility but you might have to close the deal even if you do not want to close the deal at a point of time. Moreover you have to pay the lender any dividends or other benefits that are declared for the stocks within the period of holding the short. This is simply because the original owner of the stocks is not you but the lender of the stocks.

Short selling is a preferred way of making money at market that is volatile. Investors generally short sell for a particular stock when they feel that the specific stock is unusually overpriced and all set to fall. Short selling is also used by the investors for portfolio protection. When the market is seeing huge reduction in stock prices it is common practice of the investors to short the falling stocks to cover up the losses in the long.

If you are thinking that short selling is just about selling the stocks at higher price and buying them back at lower price, you must have mistaken. To make profit from short selling, you have to find out stocks that are sure to fall and for that you need to have a comprehensive knowledge of the market and have great deal of research.